federal-plus-state tax rate is 40%, and its WACC is 15%. a. Should it replace th
ID: 2641772 • Letter: F
Question
federal-plus-state tax rate is 40%, and its WACC is 15%.
a. Should it replace the old steamer?
b. NPV of replace = $2,083.51 SHOW WORK HOW TO GET THIS ANSWER
The Gilbert Instrument Corporation is considering replacing the wood steamer it currently uses to shape guitar sides. The steamer has 6 years of remaining life. If kept, the steamer will have depreciaiton expenses of $650 for five years and $325 for the sixth year. Its current book value is $3,575, and it can be sold on an Internet auction site for $4,150 at this time. If the old steamer is not replaced, it can be sold for $800 at the end of its useful life. Gilbert is considering purchasing the Side Steamer 3000, a higher-end steamer, which costs $12,000 and has an estimated useful life of 6 years with an estimated salvage value of $1,500. This steamer falls into the MACRS 5-year class, so the applicable depreciation rates are 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76%. The new steamer is faster and allows for an output expansion, so sales would rise by $2,000 per year; the new machine's much greater efficiency would reduce operating expenses by $1,900 per year. To support the greater sales, the new machine would require that inventories increase by $2,900, but accounts payable would simultaneously increase by $700. Gilbert's marginalfederal-plus-state tax rate is 40%, and its WACC is 15%.
a. Should it replace the old steamer?
b. NPV of replace = $2,083.51 SHOW WORK HOW TO GET THIS ANSWER
Explanation / Answer
The difference between two cash flow is 20184 = 3219 - 1135.
Hope you understood the point now.
1135.28
3,219
Depreciation sales operating exp salvage value working capital cash inflows PV of cashflows 960 1200 1140 3300 2,870 1536 1200 1140 3876 2,931 921.6 1200 1140 3261.6 2,145 552.96 1200 1140 2892.96 1,654 552.96 1200 1140 2892.96 1,438 276.48 1200 1140 900 2200 5716.48 2,471 13,509 Depreciation Tax banefit from depreciation Cash inflow PV of cash inflow 650 260 260 226.087 650 260 260 196.5974 650 260 260 170.9542 650 260 260 148.6558 650 260 260 129.266 325 130 480 610 263.7198The difference between two cash flow is 20184 = 3219 - 1135.
Hope you understood the point now.
1135.28
Total present value of cash flow3,219
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.